K. Rogoff, Wall to Wall Wal Mart ( http://www.project syndicate.org/commentary/rogoff15 ) Section The Socio Political Background was possible to define the long – term prospects of growth in each industry, to concentrate financial (budget) resources thereon, and to achieve some specified goals. That was precisely how the Soviet Union pursued its industrialization, but similar (although not so ruthless) instruments were applied in the western world as well.

In the 1990s, the majority of recommendations concerned with industrial pol icy were based on precisely such logic. And it is this logic that was causing the aversion of liberal critics, who insisted on the impossibility and inadmissibility of the logic of industrialization being used in the contemporary epoch. The high rate of the transformation of needs and the potential for their satisfaction, coupled with the rapid pace of technological innovation, have sharply reduced the predictability of industrial production. It is now becoming impossible – and irresponsible – to de termine the long – term priorities as a basis for taking large – scale budgeting deci sions. This impossibility is further emphasized by the problems faced by the post – communist Russia, where the weakness of political institutions could well conduce to “political entrepreneurship” rather than to the advent of State – guided innova tion.

However, in recent years the perception of industrial policy issues has, appar ently, entered a new phase, which testifies to a certain growth in the maturity of the Russian political elite.

Firstly, the President has formulated the national priorities, and labeling as such human development, and not certain branches of industry. The emphasis placed on education, public health care, living conditions, and human reproduction as such (the falling birthrate problem) has been manifest of a step of fundamental importance in overcoming the logic of industrialism and the Soviet understanding of economic problems in general, and in recognizing the realities of the post – in dustrial epoch.

Secondly, the quantitative benchmarks of growth (the demand to “double the GDP”) have been steadily losing ground to the realization of the importance to en sure the quality of growth, and especially that of its innovative base – the theme of innovation is becoming one of the central issues, when the tasks and mechanisms of economic policy are being discussed. In 2006, the dissatisfaction with the slow pace of proliferation of high technologies was expressed in the already mentioned discussions.

The latter criticism was aimed both at the structure of industrial and individual consumption, and at the structure of production, and in particular, that of exports.

Thus, the share of high – tech exports in the total volume of exports does not ex ceed 4 %, which is far below the same index of developed countries, and even of China (by more than 25 %).7.

In other words, last year has provided sufficient examples of the growing awareness that modern industrial policy, in order to be authentically modern and See Tsentr razvitiia. Obozrenie rossiiskoi ekonomiki (za period s 12 po 25 dekabria 2006 g.)(The center of development. A review of the Russian economy (for the period from 12 to 25 December 2006)).

RUSSIAN ECONOMY IN trends and outlooks effective, should become considerably different from what was understood as such throughout the major part of the 20th century. Nowadays it has to do, for the most part, with the formation of a system of incentives for the development of different industrial sectors, without any rigid establishment of their priorities.

The key industrial policy instruments used by the Russian Government are as follows: private – public partnership, the exchange rate policy (aimed at restraining the rouble’s strengthening), the regulation of customs tariffs, technical regulation, support for the export of processed products export, and some other forms.

Institutions of development An important role in stimulating economic grows should be played by the spe cial economic zones, the Investment Fund, the Russian Investment Fund for Infor mation and Communication Technologies, the Venture Fund (the Russian Venture Company), the Agency for Mortgage Crediting of Housing Construction (AMCHC), and the Corporation (or Bank) for Development. Last year saw the beginning of the practical realization of the first three instruments. The AMCHC has already been in existence for a number of years. The authorities have initiated a active scrutiny of the problems of venture financing and the Bank for Development.

A number of special economic zones (SEZ) two industrial production zones (in Lipetsk Oblast and Tatarstan) and four technical development zones (in Dubna, Zelenograd, St Petersburg and Tomsk) were created in 2006. It is yet too early to offer any comments as to their practical effectiveness. At the present time, the process of developing the zones’ infrastructure is under way, and negotiations are being held with potential candidates for obtaining the status of residents. Al though there are plenty of applicants eager to launch their production in the SEZs, no “break – through” projects backed by strong investment or involving unique technologies have surfaced so far. And it is not surprising: on the one hand, the Russian SEZs do not offer any significant tax preferences, and on the other it will take some time to develop the infrastructure. Also, there has emerged a problem that should have been taken into consideration when developing this mechanism for stimulating investment – it is advisable that the producers of exports should be attracted into the SEZs, with no distortions of the conditions for domestic competi tion being permitted. But so far, under the influence of the inertia produced by a decade of crisis, most of the zones are oriented to manufacturing import – substi tuting products.

In 2006, the amendments to the existing law introducing special economic zones of the tourist and recreational type (SEZ – TRT) were adopted. It is significant that these zones offer practically no tax benefits, while the incentives aimed at in creasing its attractiveness have been changed so as to promote state investments in the infrastructure (industrial, communal, and transport); at the same time, fed eral investments must be combined with those funded from regional and municipal budgets. In fact, the choice made by the Federal Government in favor of SEZ – TRT is akin to the selection of projects financed from the Investment Fund: the State adopts the responsibility to finance the infrastructural costs which conduce not Section The Socio Political Background only to the development of this type of business but also create additional incen tives in order to boost the economy of a corresponding region. This makes the SEZ – TRT regime more attractive to the Federation’s subjects who thus acquire an additional resource for developing the areas with potential advantages for develop ing tourism. The winners in the recent contest were Irkutsk Oblast and Buriatia, Al tai Krai and the Republic of Altai, Krasnodar Krai, Stavropol Krai, and Kaliningrad Oblast.

It is worth mentioning that, at present, Kaliningrad Oblast has two SEZ re gimes operating in its territory: in 2006, the general Law “On the Special Economic Zone in Kaliningrad Oblast” entered into force, and at the same time it became possible for the Oblast to develop some sections of the Baltic coast under the SEZ – TRT regime. The above mentioned general law has resulted from the year long discussion concerning the advisability of introducing a special economic re gime in this oblast. The new law has replaced the special regime introduced in 1996, which was based on customs privileges being granted to the import of con sumer and capital goods into the region. Undoubtedly, the old mechanism, though mainly successful in stimulating the import of goods and the assembly of imported goods from parts for their subsequent realization in the main territory of Russia, did manage to play a certain positive role in the adaptation of the formerly closed mili tarized region to market conditions. The new Federal Law, which entered into force from 1 April 2006, mainly stimulates investment activity by granting considerable privileges to those entrepreneurs who are willing to establish new enterprises in the region. The adoption of the Law has already resulted in an upsurge of investment activity in Kaliningrad Oblast.

In 2006, the Investment Fund also began functioning. From the very begin ning, it was planned that it should be formed it within the framework of the federal budget in a situation when the prices of fuel and energy resources were high. In es sence, it is the money which otherwise would have been transferred into the Stabili zation Fund. Given the enormous pressure being applied to the financial bodies so as to force them to spend the petrodollars on the development of the “national economy”, the Government has agreed to a compromise solution by allocating a part of the funds to state investments. Naturally, this decision has somewhat in creased the vulnerability of the Russian economy should the oil prices change un favorably, but would not be fatal if two conditions are observed. Firstly, the size of the Investment Fund should remain moderate in relation to that of the Stabilization Fund, and secondly, the resources of the Stabilization Fund should be spent really efficiently, that is, the spending should result in a rise in labor productivity and in positive structural changes (a diminished dependence on raw materials) in the Russian economy. Nevertheless, it should be taken into account that if the oil prices plummet, the resources of the Stabilization Fund should be primarily allo cated to the fulfillment of the obligations assumed within the framework of invest ment projects, and only after this has been done – to the compensating for the re duction in other budget expenditures.

RUSSIAN ECONOMY IN trends and outlooks It is planned that the afore – said state support should be used when imple menting the projects aimed at developing the infrastructure of national importance, and also in order to create and develop certain elements of the Russian innovation system, as well as to ensure the realization of institutional reforms. Under present conditions, the latter component ( institutional innovation) is especially important, for this innovation is a key factor of the dynamic development of both the infrastructure and the innovations.

In 2006, the selection of projects to be financed from the Investment Fund was started. The actual decisions were to be made by the Government Commission for Investment Project of National Importance having the final say. The majority of applications submitted in 2006 were concerned with the transport sector. Prefer ence was given to those objects of infrastructure that were of crucial importance for the development of regions or to the major production clusters associated with this infrastructure. The objects of the federal infrastructure that are being created at the expense of the Investment Fund stimulate large – scale investments on the part of the private sector. In 2006, the volume of the Investment Fund amounted to approximately 70 billion roubles, while the long – term financial plan envisages its increase to 378 billion roubles in the years 2007 – 09.

On the whole, the selected projects can be subdivided into two categories:

first, the transport projects designed to eliminate the infrastructural limitations that impede the development of the economy and to increase the mobility of the popu lation; and second, the projects aimed at the industrial development of the coun try’s territories and of new mineral deposits. Among the selected projects the fol lowing ones are especially worth mentioning: the construction of the “Western High – Speed Diameter” and of a tunnel under the River Neva in St. Petersburg, and a section of the speedway from Moscow to St Petersburg; the largest project in the sphere of infrastructure the complex development of the Lower Angara region in Krasnoiarsk Krai, related to the formation of the biggest production cluster in Eastern Siberia; the creation of a transport infrastructure in Chita Oblast and Kras nodar Krai; and a number of other objects. The share of federal co–financing in such projects varies between 13 % and 60 %, and, as a rule, the larger the project, the smaller is the share of public finances.

The already supported projects have by no means exhausted the resources consolidated to the Investment Fund by the 2006 budget. The emerging situation inspires certain optimism because it is indicative of a cautious approach being taken toward spending budget resources on investment projects, and of the grow ing understanding of the extreme vulnerability of state investments to inefficient and even corrupt decisions8.

The problem of the inefficiency and vulnerability of state investment projects to corruption is not limited to Russia alone, or to developing economies. For the problems faced in this sphere, see Flyvbjerg, B. Strategicheskaia otsenka planirovaniia krupnykh infrastrukturnykh proektov (Strategic valuation of policy and planning for large infrastructure projects) // Ekonomicheskaia politika (Eco nomic policy). 2006. № 1.

Section The Socio Political Background In 2006, it was also decided to form the Venture Investment Fund. It is planned that this instrument would play a key role in stimulating innovation activity and in promoting high – tech manufacturing in industry. In order to increase the investors’ interest in the innovation sector, it is planned to decrease their risks and increase the profitability of venture investments by means of some state participation in pri vate venture funds.

In 2006 – 07, the authorized capital of the Venture Fund should be financed by the Investment Fund in the amount of approximately 15 billion roubles. It is sug gested that the resources of the Venture Fund, among other things (and first of all), should be spent on the development of nanotechnologies, on increasing the capital of the financial institutions specializing in leasing, and on crediting and insuring contracts for the acquisition of state of the art technologies.